This month the Government announced a new Social Care Levy to pay for the cost of both Social Care, and the backlog of patients for the NHS following the COVID crisis.
From April 2022 there will be a 1.25% rise in the national insurance contribution rate, for both employees’ and employers’ contributions.
This also applies to the self-employed.
Owner-managers of limited companies face the same increase in tax on their dividends.
So how does this affect the money in your pocket, and what else do we know, and not know?
How will the levy be applied?
From April 2022 the levy will be included in the national insurance figure on the employee’s payslip. This applies for 1 year only.
From April 2023 it will be calculated and shown as a Health and Social Care levy (HSC), separate from the national insurance figure.
The same will apply for the self-employed within their self-assessment calculation.
For owner-managers it will be an additional tax charge from April 2022, in their self-assessment calculation. It is not clear whether this will show as part of the tax payable or as a separate charge.
The cost of Dividends
The 1.25% increase applies to tax on dividends. It is understood (though officially unconfirmed) that the first £2000 of dividends, currently covered by the annual dividend allowance, will not incur this charge.
As a simple calculation, ignoring the dividend allowance and any other income received, the cost to the shareholder will be:
Additional tax payable
It may be worth bringing dividends forward into the current tax year to save some tax, but this will depend on your level of income. It is important not to place yourself in a higher tax band by doing so.
The cost for Employers
Employer’s national insurance is payable on income above £170 per week. Assuming earnings are even throughout the year, the cost of the increase to employers will be: –
Corp. Tax saved
What about the Employer’s Allowance?
Currently many employers receive an annual allowance of £4000 against national insurance contributions. We know that for 2022/23, whilst the charge is calculated as part of national insurance, it will be included within the allowance.
However, from 2023 the charge will be shown as an HSC levy, and we do not yet know whether this can be offset against the employment allowance.
In other words, if your annual national insurance cost is currently, say £2000, it falls within the allowance so no payment is required.
In 2022/23, if the levy cost causes this to rise to, say £2200, this still falls within the allowance so no Employers’ NI will need to paid over to HMRC.
From 2023/24, when the levy is calculated separately, we do not know whether the extra £200 charge will fall within the allowance, or if it will be payable to HMRC.
The cost for employees
Employee’s national insurance is payable on income above £184 per week. Assuming earnings are even throughout the year, the cost of the increase to employers will be: –
Additional NI payable
A point to note here. If an employee is over state pension age, they do not currently pay national insurance contributions.
From April 2023, when the charge changes from a national insurance increase to a separate levy, they will be required to pay the levy of 1.25% on earnings above the threshold.
The cost for self-employed
The additional levy costs will be the same as for employees.
This includes anyone over state retirement age, who will also pay the levy from April 2023, even though they do not currently pay national insurance.